Tecnoglass Inc.
Q3 2016 Earnings Call Transcript

Published: 31 Oct 2016

[Operator:]

Greetings and welcome to the Tecnoglass Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Rodny Nacier with ICR. Thank you, Mr. Nacier. You may begin.

[Rodny Nacier:]

Thank you for joining us for Tecnoglass’ third quarter 2016 conference call. A copy of the slide presentation to accompany this call may be obtained on the Investor section of the Tecnoglass Web site at www.tecnoglass.com. Our speakers for the call today will be José Manuel Daes, Chief Executive Officer and Santiago Giraldo, Deputy CFO. Moving to Slide 2, before turning the call over to José Manuel, I would like to remind everyone that matters discussed in this call, except for historical information, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding our future financial performance, future growth and future acquisitions. These statements are based on Tecnoglass’ current expectations or beliefs and are subject to uncertainty and changes in circumstances. Actual results may differ in a material nature from those expressed or implied by any of the statements herein due to changes in economic, business, competitive and/or regulatory factors and other risks and uncertainties affecting the operation of Tecnoglass' business. These risks, uncertainties and contingencies are indicated from time-to-time in Tecnoglass' filing with the Securities and Exchange Commission. The information discussed during the call is presented in light of such risks. Further, investors should keep in mind that Tecnoglass' financial results in any particular period may not be indicative of future results. Tecnoglass is under no obligation to and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise. I will now turn the call over to José Manuel.

[José Manuel Daes:]

Thank you, Rodny and thanks everyone for participating on today's call. I will begin with a review of our third quarter highlight; Santiago will then discuss more details on our operations, our financial results, balance sheet and outlook. Beginning with our financial highlights on Slide 4, Tecnoglass is a leading manufacturer of architectural glass, windows and associated aluminum products for the global commercial and residential construction industry. We have grown our business significantly since 2012 with the significant majority of that growth coming from the U.S. The positive momentum in our overall business continued into the second half of 2016. We outpaced industry growth in our primary U.S. and Colombian markets to deliver 27% growth in net sales. We experienced a strong progress across our diversified footprint. In the U.S., we gained additional market share with revenues up 16.1% year-over-year, increasing for the 15th straight quarter. In Latin America, we performed extremely well with Colombian revenues up 51% in local currency. We grew operating income by 42% and increased adjusted EBITDA by 21%. This profit growth was derived from our growth in sales coupled with our low-cost efficient and vertical integrated operations, which continue to provide us with a sustainable platform to provide the industry leading margin. Turning to Slide number 5, our progress throughout America is evident in our backlog, which rose 12% year-over-year to a record $402 million with a good mix of project wins in all services. We also increased backlog from $398 million in the [prior quarter] [ph], representing the eighth quarter of growth, which reinforces the strength of our strategy, product diversity and widening customer relationship. Favorable demand in our commercial construction end-market is also a contributing factor. The building environment was strong throughout the third quarter and remained very active. We ended the quarter with good visibility on our multi-year project pipeline and we are actively pursuing new projects to grow our business. I will now turn the call over to Santiago to provide additional details on our operations, results and outlook. Santiago?

[Santiago Giraldo:]

Thank you, José Manuel, and good morning to all of you on the line. Turning to Slide 6, looking more closely on our backlog by geography a significant portion of our growth in recent years reflects our targeted efforts to use our dominance from hold in Florida to expanding to other U.S. markets through our longstanding commitment to quality, innovation and service. This U.S. expansion continues to drive high margins in our business, and we now operating a growing list of highly populated areas such as Baltimore, California, New York, New Jersey and Texas. To be clear, while we have received a healthy amount of quotes in new markets, we also continue to see a lot of current activity in our Florida base. Overall, approximately 60% of our backlog was for the U.S. market, supporting our expectation for the U.S. to continue to represent the largest share of our business. In Colombia, the improving economy and rising income per capita is supporting a strong pipeline of commercial construction activity. We are further capitalizing on our local leadership position to produce outpace market growth. This rapid growth is reflecting backlog, which had a strong mix of Columbian projects compared to a year ago. Moving to Slide number 7, our end-markets are primarily commercial, which tends to [indiscernible] initial by one or two years and provide some visibility on common growth or construction in other years. As you can see in our backlog trend, approximately 90% of our business comes from commercial, which include multi-family projects. In these commercial markets, we continue to experience a favorable pace of activity throughout our footprint in mid and high-rise rental buildings, office buildings and hotels. The remainder of our business is residentially focused which remains a potential longer -- long-term opportunity as we introduce new products as part of our short-term strategy. Moving to Slide number 8, during the third quarter, we gained additional market share in the U.S. as we continue to broaden our customer relationships and strengthened our presence in new markets across an increasingly diversified footprint. Our expansion is also benefiting from the favorable construction recovery and limited excess production capacity. Even though the multi-family high-rise building activity in South Florida may soften in the future, we are compensating with other types of projects such as rentals, office buildings, high-rises and hotels as previously mentioned. The ABI Index continues to support an expansionary environment with most of that growth in the Southeast where we enjoy our strongest leadership positions. The ABI rating is further supported by the Dodge Data which shows us -- shows U.S. construction activity up 10% in 2016 and poised for low double digit growth in 2017 including office and store construction which represent a large part of our business. Furthermore, I'd like to add a few points which are specific to our business. Number one, we typically bid on large multi-million dollar projects, which have long lead times allowing us to prepare for our pipeline of non-project activity as you can see in our backlog. Number two, we sell our diversified set of windows and glass products, which help us broaden our exposure to several types of commercial project activity. Number three, our focus on new product introductions continues to win us new contracts and increase business with current customers. Finally, our strategy, manufacturing capacity, location, and access to talented labor gives us a very sustainable competitive cost advantage. Moving on to Slide number 9, we believe our primary growth channels are in the U.S. longer term. That said, we have had phenomenal success in Colombia during the last past several years. The Colombia economy continues on its positive growth trajectory. The Colombian GDP is growing at a steady low single-digit pace held by a widening middle class and expanding economy focused on construction and infrastructure development. To that point, on the bottom right chart, construction licenses in Columbia increased 25% in 2016 and based on core activity we have seen year-to-date, we are fairly confident that statistics on built areas remained very robust in 2016. We are the number one glass and windows company in this market. We have advantageous position versus foreign peers given our local manufacturing footprint, deep customer relationships and a low cost structure. We ended the quarter with good visibility on our multiyear project pipelines in Columbia and we are actively pursuing new projects to grow our business. While we cannot control the pace of the commercial recovery in the U.S., Columbia or Latin America, the commercial activity I discussed today in our markets gives us confidence that we can continue to grow our sales faster than the architectural glass and windows industry for the upcoming years. We are very nicely situated and truly believe we have a unique position in a very attractive industry across the U.S. and Latin America. Moving to slide 11, I like to briefly recap our business strategy which has worked exceptionally well for Tecnoglass. The activity [indiscernible] represents the combination of this positive attributes of our business. We are continuously investing in our state-of-the-art facilities to enhance our production efficiencies and produce high performing products to broader our project base. This is further supported by a commitment to quality on innovation which we are able to achieve at multiple points of our very vertically integrated value chain, and we have planned strategically located down the road from the most northern ports in Latin America. We can maintain fast and reliable delivery to our over 900 global customers. Moving to slide 12, we are actively investing in our manufacturing facilities to address continued growth and incremental backlog. We are also actively implementing lean manufacturing practices to gain manufacturing and logistical efficiencies across our 2.7 million square foot plant. On prior calls, we had provided updates on select investments underway in 2016 to address capacity. On this slide, we view some of the key capacity figures through our vertically integrated operations to give us a sense of how we are investing in our business at a measured pace to meet our growth objectives. As you can see, we have the capacity to grow our business 30% to 50% across most production processes. In our tempering facility or Tecnoglass S.A., we installed a new insulated glass unit. We are installing one tempering line, one silk-screening automatic machine and one new insulated line in a new co-located plant that has to the order lines installed this year. These additions will help us increase output on our glass tempering facility mainly using our internal supply soft coat glass. At our soft coat glass facility internal demand is consuming 20% of the soft coat system which remains on target versus original projections and still leaves us significant room for external sales overtime. Turning to slide 13, we have undergone a robust CapEx expansion phase in recent years to stay ahead of sustained growth in customer order. We had an intensive CapEx investment phase in 2015 with the completion of our soft coat facility and other operational enhancements. Collectively, our investments in capacity have helped us more efficiently expand our production capabilities to better serve our customers. In 2016, our investments have been more targeted which have driven down CapEx as a percentage of sales to 18.5% and that leaves us with a strong installed capacity to grow in the years to come. Furthermore, we are pleased to have completed these investments while maintaining prudent debt levels and conservative leverage metrics with net debt to EBITDA below 3 times. We expect our growth in the U.S. and Latin American markets to continue as we move forward to 2016. Turning into some recent developments in our business on slide number 14, in September, we completed a warrant exchange offer with a successful tender of approximately 82% of their spending warrants which have arrived in a more robust equity structure and lower volatility in our P&L. The tender warrants will now expire by December 20 at which point we will fully eliminate such liability. So through the offering, we were able to attain three main benefits

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jeremy Hamblin from Dougherty and Company. Please proceed with your question.

[Jeremy Hamblin:]

Good morning, gentlemen. Congratulations on another strong quarter. Wanted to start by just asking about the sales guidance for the fourth quarter. The implied figure is right around $70 million, a step-down from what you saw, obviously, the last two quarters. Just want to make sure I understand that you did see strong backlog growth again. Is this just seasonality? Is this because you have greater exposure into U.S. markets than you ever have before? Just can you provide some color on this step-down on sales from the run rates that you’ve seen in the last couple of quarters or is it just specific to individual projects?

[José Manuel Daes:]

Jeremy, let me explain. We close the factory around December 20 or December 22. So we have one week left to work. And number two, we are being conservative. We hope to do a little more than that. But as I said, we close one week and we want to play conservative.

[Jeremy Hamblin:]

Okay, great. Understood. And then in terms of – in a similar vein just looking forward, you do – the $40 million plus in backlog provides nice visibility on 2017. Just in terms of the industry, we understand that you're taking share. How do you think the industry is shaping up? Would you expect your peers also to see nice growth heading into next year? Do you feel like market conditions remain strong?

[José Manuel Daes:]

Yes, I do, I do. We are not only in the market to sell windows, but we also sell glass and aluminum to some of our competitors and everybody is increasing. So we believe the market is strong and we believe everybody is going to grow. I don’t know if [indiscernible] or not. But the market has weakened in a few spots like, for example, in South Florida, we are seeing a slowdown in commercial high-rise for multifamily condos, but by the same token that we're seeing a lot of hotels, commercial properties for offices and shopping center and a lot of rentals now – I mean, rentals is really strong, high-rise for rental. So one thing compensated the other. And then as we are moving away from Florida a lot, we're gaining a lot of ground in Boston, Chicago, and Philadelphia.

[Jeremy Hamblin:]

Great. I also want to -- I wasn’t sure if Christian was on the line, but I wanted to ask about the progress being made on the soft coat production facility. And I know that got off to a slower start this year than had been planned. Any status update on that? When you expect to achieve the $6 million to $8 million in annual savings run rate that you had forecast about a year ago?

[José Manuel Daes:]

Christian is not available. I can answer that. The thing is this, Jeremy. We have found now that most of the glass that is sold with soft coat, it’s insulated related. And we were not prepared enough for insulated line. So we have two insulated lines and we're adding one more in January and perhaps another one in June in order for us to sell the additional capacity we have in soft coat. That is what is happening.

[Jeremy Hamblin:]

So it sounds like the expectation would be to get to that savings run rate by the middle of next year. Is that of accurate?

[José Manuel Daes:]

Yes.

[Jeremy Hamblin:]

Okay. And – what about in terms of – I know there had been – one of the issues was that you had started some projects using externally sourced soft coated glass and wanting to make sure to please customers did not want to transition to your proprietary product. Have you mostly transitioned at this point to not have any leftover projects that had PPG glass as opposed to the Tecnoglass, are we've kind of through that phase?

[José Manuel Daes:]

Yeah, we’re mostly out of it. We are like 85% done. There remains two or three jobs that we just need to finish and that will be it. We hope by March or May we may end up with all the backlog we have on the PPG glass. The problem with transition is that no matter what you do, since our machine is lot newer than theirs, the color difference even though is slight that is a difference. And we didn’t want to mix one glass with the other because then it might look different then we have a lot of trouble.

[Jeremy Hamblin:]

Okay, understood. Just shifting gears here, a question I think for Santiago on the share counts. Could you just walk me through, I see on Slide 14, the results of the dividend election. There's a quote in here for roughly 31.6 million shares. Is that basic shares outstanding or is that the diluted count?

[Santiago Giraldo:]

That that includes 1.5 million of earn-out that have not been released, Jeremy. So as of now what you see is closer to 30 million and what you will have on a fully diluted count is the remaining warrants that have not been exercised plus the 1.5 million that I just mentioned. That will get you to a fully diluted count of about 31.6 million.

[Jeremy Hamblin:]

Okay. And then I guess modeling going forward we should be thinking there's probably going to be a similar election profile to take stock dividends and so we could be adding roughly 275,000 to 300,000 shares per quarter to the basic share count?

[Santiago Giraldo:]

Yeah, actually, there was an 8K filed this morning reiterating that Energy Holding Corp. as majority shareholder is committed to take in stock for the three next quarters. So it’s a fair assumption to model a similar breakdown on the election.

[Jeremy Hamblin:]

Okay. Wanted to just ask one other question related to input costs and what you are seeing. We have seen a little bit of a rise in aluminum costs over the last month or two. Just in terms -- could you comment on what you're seeing overall on input costs? And as it relates to your gross profit, you saw a nice acceleration on gross profit, almost 300 basis points from the second quarter and we know there were some things specific to El Niño in Q2, but how should we be thinking about gross margins moving forward? Is this kind of 36% to 37% a pretty soon good estimate on that?

[Santiago Giraldo:]

Yeah, I think that's a fair assumption in a conservative way of looking at it. We mostly try to make our raw materials cost as a pass through in the way that we structure our contracts. So despite of what volatility you may see on raw material prices, you should expect us to maintain – to be able to maintain our margins going forward. We’d always like to get a pick of additional spread in there, but being conservative, I would model it at that range between 36%, 37%.

[Jeremy Hamblin:]

To this effect on products mix, I saw that was a slight drag in the quarter – given the backlog, the visibility you have there, how should we be thinking about product mix as a contributor to gross margins for 2017?

[Santiago Giraldo:]

I don’t know if José Manuel has a different opinion, but I think you would continue to focus on a lot of commercial type construction and just kind of model it flat. I think it would be too risky to assume otherwise given the composition of the current backlog. I think you would just assume the product and product mix, which probably not changed margin significantly and everything is just going to come more from the volume side of the equation.

[Jeremy Hamblin:]

Understood. Congratulations. I will hop back in the queue and let others ask questions.

[Santiago Giraldo:]

All right. Thank you, Jeremy.

[José Manuel Daes:]

Thank you.

[Operator:]

There are no other questions in queue. I would like to hand the call back over to management for closing comments.

[José Manuel Daes:]

Okay. Thank you everybody for participating in today’s call and for the continuing interest in Tecnoglass. We look forward to speaking again soon. Thank you.

[Operator:]

Ladies and gentlemen, this doesn't conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.